Real Estate Prices and Economic Cycles

Studies of the linkages between real estate prices and general economic conditions have an extensive history, beginning with tabulations suggesting the ways in which long swings in construction and price development were synchronized with long swings in aggregate economic activity (Gottlieb, 1976). Recent studies have explored the implications of alternative representations of investor expectations upon real estate construction and the cyclical behavior of housing prices and the rents for non-residential properties. These models trace through the effects upon supplier and demander behavior of differing price expectations in the real estate market. The earliest models tease out the dynamic paths of housing prices and commercial rents which arise from exogenous expectations about the future course of prices. More sophisticated models assume that households and firms have adaptive expectations about the future, assuming, for example, myopic behavior on the part of economic actors (in which they forecast that current conditions or current rates of change will continue into the future). In the most modern formulation of market dynamics, actors are assumed to have rational expectations. That is, in response to unanticipated shocks in the